Tuesday, 19 June 2007

At a meeting in the Prime Minister’s Office (PMO) on Monday, the first serious steps since independence were taken towards building a comprehensive network of roads, tracks and hydro power stations in the areas of Ladakh and Arunachal Pradesh that are claimed by both China and India. In contrast, the Middle Kingdom has wasted no time in developing its outlying territories, even those that are disputed. New Delhi, however, has been guided by a military and intelligence establishment, which has argued that any roads that it builds in these areas could be used during hostilities by Chinese invading forces. Also holding back development has been the argument that, with a border dialogue with China progressing nicely, why rock the boat with “provocative” construction activity? But now, 45 years after the 1962 debacle, a more confident PMO has committed Rs 1000 crores to linking the border areas with mainland India.

This is not a one-off initiative. On Saturday, India’s foreign minister, Pranab Mukherjee, travelled to Shillong for a first ever “public diplomacy” initiative, talking of cross-border linkages between the Seven Sisters of the north-east (Arunachal, Assam, Manipur, Meghalaya, Mizoram, Nagaland and Tripura) and the South East Asian countries like Myanmar and Thailand. Mr Mukherjee promised a network of linkages like the Kaladan Multi-Modal Transit Transport facility (connecting Indian eastern ports, through Myanmar’s Sittwe port, and then via riverine transport, to a road in Mizoram), an India-Thailand Trilateral Highway Project, an India-Vietnam rail link, and an India-Bangladesh passenger train.

The background to this is an 8-month-old hardening by China of its rhetoric over the border dispute. In November 2006, ahead of President Hu Jintao’s visit to India, Beijing turned down an Indian request for a meeting of the Special Representatives who are negotiating a border settlement. Immediately afterwards, the usually silent Chinese ambassador to India stridently and publicly declared that Arunachal was disputed territory. Over the last few months, China has refused visas to Indians from Arunachal, suggesting that they are Chinese citizens who need no visa. And in the G8 summit in Hamburg two weeks ago, China’s foreign minister Yang Jiechi declared that the presence of “settled populations” in Arunachal would not affect China’s claims to that state. In doing so, Beijing has signalled that it could turn its back on the agreement signed by Premier Wen Jiabao during the high water mark in the Sino-Indian relationship in 2005, in which Article 7 agreed that “In reaching a boundary settlement, the two sides shall safeguard due interests of their settled populations in the border areas.” The Chinese establishment had never been happy about agreeing to this provision.

Larger global forces usually drive shifts in regional dynamics, of the kind being witnessed between India and China. The new global geo-political order, as seen from New Delhi, is being catalysed by rapidly deteriorating relations between Washington and Moscow. After a decade of viewing China as America’s new long-term threat, Russia has re-emerged from the Cold War meltdown as Washington’s most likely present-day threat. In tackling Russia, China, like in 1972, could suddenly be Washington’s new countervailing ally. Key officials in New Delhi are already visualising a changing environment in which India is no longer the key partner, needed to balance China. And China’s aggressive new rhetoric on the border question is seen as coming from this realisation in Beijing.

If evidence were needed of the shift in relationships, it was there to see in the G-8 summit in Germany two weeks ago. While global warming was the official summit theme, there was equal focus on the growing chill between former Cold War adversaries, Russia and America. Russian president, Vladimir Putin, focused the spotlight straight on the greatest fault line: a planned US missile interceptor shield in eastern Europe, right at Russia’s doorstep, ostensibly to guard against missiles launched from Iran. Russia offered an alternative: the use of an existing Russian radar station in Azerbaijan, right at Iran’s doorstep. Washington says the Russian radar was too close to Iran; it still needed the X-band radar that it plans to set up in the Czech Republic and the interceptors that it will base in Poland. On Friday, NATO approved the US interceptor shield.

China, in contrast, is now viewed from Washington as the lesser of the two evils. Washington has appreciated Beijing’s “positive role” in driving the dialogue with North Korea. China is also working behind the scenes in resolving Iran’s uranium enrichment face-off. And gone are Washington’s neo-conservatives, like Donald Rumsfeld and Paul Wolfowitz, who saw the US global challenge as containing China through a ring of allies. In their place now are self-described “Cold Warriors” like Robert Gates, who were brought up seeing China as the irreplaceable cornerstone in the Asia-Pacific security architecture. At the Shangri La Dialogue on the 1st of June, in a forum that had been used before him by Donald Rumsfeld for unrestrained China-bashing, Gates pronounced himself optimistic about America’s relationship with China.

China, not India, could be the new swing state in the new global security architecture. What does that mean for Sino-India relations? What does it mean for the future of the US-India nuclear deal? The answer lies in the way Russia’s relationship with America plays out. But whatever the outcome, India must continue with consolidating its internal and regional relationships. In the shifting winds of global diplomacy, these relationships will form its anchor.

Thursday, 7 June 2007

In a low-key meeting in the Ministry of Defence (MoD) today, the Prabir Sengupta Committee presented its recommendations before Defence Minister AK Antony on which private companies should be granted the title of Raksha Utpadan Ratnas (RuRs) or Champions of Industry.

Set up in May 2006, the Committee examined the applications of 41 Indian companies that applied for RuR status. Some 15 of them, including Mahindra & Mahindra, Tata, and L&T, were called between Dec 2006 and Feb 2007, to make presentations before the Committee. The MoD has kept a lid on how many have been finally recommended for RuR status; sources say the figure is 5-7 companies.

The report will now be considered by the Defence Acquisition Council (DAC), after which the selected companies shall be recognized as RuRs. The status shall continue for a period of five years, after which the Selection Committee and the DAC will have the discretion to give further three-year extensions. Defence Minister AK Antony says DAC approval will be accorded at the earliest. Mr Antony announced, “I hope it will happen by the end of this year.”

Companies selected as RuRs shall be treated equally, for the purpose of defence production, with Defence Public Sector Undertakings (DPSUs) and Ordnance Factories (OFs). The benefits that are linked to RuR status are:

• Eligibility to design, develop and produce major weapons platforms and defence systems.

• They will also be eligible to manufacture weapons and equipment developed by the Defence R&D Organisation (DRDO). Currently all such production is awarded to DPSUs and OFs.

• Eligible to receive technology from foreign defence corporations, and to undertake licensed production of foreign-origin systems.

• Eligible to undertake defence R&D, funded by the MoD, which has already announced that it will fund 80% of the cost of R&D by RuRs into specified defence systems.

• Eligible for duty-free import of equipment for defence R&D and for preparing prototypes of weapons and equipment.

Mahindra & Mahindra’s fully owned defence subsidiary, Mahindra Defence Systems, set up in 2000, is one of the companies that could be nominated an RuR. Brigadier Khutab Hai, Chief Executive, Mahindra Defence Systems says, “This is a very important day for us, provided the MoD actually equates the RuRs with DPSUs. We should be allowed to develop high-tech weapons platforms by benefiting from R&D funding, sharing knowledge with the DRDO, and working with the services headquarters to have a clear idea of their requirements well ahead of time, so that we are clear about what systems we need to develop for them.”

The backlash from the public sector has already begun. Trade unions from OFs and DPSUs have challenged the entry of the private sector into defence production on the grounds that this will take away their jobs. After accepting the Committee report on RuRs, the Defence Minister allayed trade union fears. Mr Antony stated, “we’ll clarify our positions to the trade unions. We want to make it clear that there is no intention to weaken the DPSUs. Even the combined public and private sector does not have the capacity to meet all the defence business that will be generated as a result of the 30% offset on defence imports. So we are bringing in reputed, credible private sector companies to increase our ability. But we will make sure that we do not weaken the DPSUs.”

Tuesday, 5 June 2007

Tomorrow, the Defence Minister will know the names of the private companies that will challenge, in the field of defence production, India’s leaden-footed defence public sector undertakings (DPSUs) and ordnance factories (OFs). After a full year of deliberations, the Prabir Sengupta Committee will place before Mr AK Antony its recommendations on companies which should be granted the honorific of Raksha Utpadan Ratnas (RuRs) or Champions. This classification will entitle its holder to be treated equally with DPSUs and OFs, which have long dominated the lucrative defence market because of their direct links with the MoD. The good news doesn’t end there. The RuRs/Champions will also be entitled to MoD funds for R&D in projects specified by the services.

Change has come slowly since private industry was allowed into defence production in 2001. Little happened in the years following that watershed, but in 2005 a report prepared by the redoubtable Vijay Kelkar lit the path for transforming the relationship between the military, the ministry, and industry. The Prabir Sengupta Committee was born from Kelkar’s recommendations. In 2005, the MoD came up with a newer and friendlier Defence Procurement Policy, DPP-2005; a year later that was updated into a more comprehensive DPP-2006, which included a Defence Offset Policy. The offset policy, hoped the MoD, would kick-start India’s defence economy, particularly small private companies as component and sub-system feeders into the larger system integrators.

The euphoria amongst global arms majors, evident during the Aero India 2007 show in Bangalore in February, holds the promise of success. Biggies like Lockheed Martin, Northrop Grumman, Boeing, EADS and BAE systems have been pursuing offset tie-ups with Indian companies, especially the small and medium sized component manufacturers and software engineers that are cogs in the larger defence production wheel. The US-India Business Council (USIBC) has submitted, for the MoD’s consideration, a wish list of offset-related suggestions, presented in the garb of “Global Best Practices in Offsets”. The MoD’s new Defence Offsets Facilitation Agency (DOFA) is deluged with requests for clarifications and meetings from foreign defence corporations who want to structure their offset options before bidding for a contract.

But from the MoD, the response has been one step forward and one step back. Over several months, the MoD has broadly hinted that it is favourably considering the suggestions concerning offsets that have been offered by foreign companies: banking of offsets, waiving offsets in “fast-track” procurements, and permitting technology transfers to be counted as offsets in a deal. But none of these changes have been officially implemented. The only unambiguous MoD announcements relate to offset suggestions that it has rejected: the request for “indirect offsets” (investment into non-defence sectors), and the suggestion to implement “credit multipliers”, or giving higher credit to offsets into sectors where the MoD wants foreign investment.

The MoD’s logic for not officially promulgating the offset policy changes is a quintessentially bureaucratic one. Having amended the Defence Procurement Procedure twice in the last two years --- through DPP-2005 and DPP-2006 --- there is concern in South Block that too many changes too soon are not desirable. A senior MoD official says, “We don’t want to give the impression that we are changing the policy all the time.”

Also holding back any announcement of policy change is the MoD’s concern that foreign defence suppliers, even those with deals already signed, are playing for time, postponing offset proposals to benefit later from more relaxed offset procedures. The MoD, however, wants offset liabilities that have arisen since the implementation of the offset policy in September 2006 to be implemented on the initial terms. But at the same time, paradoxically, DOFA is granting extensions to foreign vendors who are pleading for more time to implement their offset liabilities.

While no global arms vendor will speak on record, there is uncertainty and concern about the direction of offset policy. The offset policy stipulates that each foreign bid for an Indian defence contract must be accompanied by an offset proposal relating to that contract. Since the offset proposals must amount to 30% of the contract value, and typically the bids are spread within 10% of each other, creating an offset proposal without increasing the overall bid could be a foreign vendor’s key to winning a contract. So, for now, a tentative dialogue continues between foreign majors and Indian private and public sector companies about outsourcing production and R&D to India.

The MoD has publicly assured the global defence industry that India’s offset policy would evolve continually and quickly. Speaking to an audience from European giant EADS, a senior MoD official explained that change would be easy because it would be done within the MoD itself. Instead of going to the Union Cabinet for a brand new policy each time changes were required, said the official, “We just have to take approval from the Defence Procurement Board and from there, with their recommendations and their views, it’ll go to the Raksha Mantri… and the amendments will be effective.”

For now, the wait continues. The history of warfare is replete with generals, so surprised at their own success, that they sacrificed initial gains by deliberately slowing their tempo. It would be ironic if this took place with the MoD’s offset policy.

The Ministry of Defence (MoD) has added another important change to the series of internal decisions on the Defence Offset Policy: foreign vendors can offer Transfer of Technology (ToT) as a way to fulfil its offsets liabilities in a deal. The MoD believes that this is a win-win situation for both vendors and for India. The MoD would gain from access to sensitive technologies that it has long been denied, while the foreign vendor would be spared the difficulties of actually implementing an offset liability: finding an Indian partner, obtaining the manufacturing licenses, and going through the uncertainties of an opaque MoD tendering procedure.

This proposal, beneficial though it appears for the Indian defence industry, has apparently been greeted with even greater enthusiasm by global defence majors.

The proposal greatly simplifies the execution of a vendor’s offset liability. MoD sources explain its working with an example that they stress is hypothetical. India could soon contract for the purchase of 197 utility helicopters from EADS subsidiary, Eurocopter. The deal would involve the purchase of 67 helicopters off-the-shelf, and the ToT and licensed production of another 130 helicopters in HAL Bangalore. If the total contract is worth $1 billion, Eurocopter would have to invest $300 million (30% of the contract value) into offsets, or defence production in India. Instead, if the value of the ToT is negotiated at $350 million, Eurocopter can simply offer it as an offset, fulfilling its $300 million liability, and banking the extra $50 million as offsets towards a future deal.

The stage for this MoD decision was set by a fortuitous set of circumstances. Firstly, the Defence R&D Organisation (DRDO), under public interrogation for its failure to deliver quickly on indigenisation, has dropped its reflexive opposition to procuring foreign technology. Confronted by its failings, the DRDO has agreed to import key technologies to develop downstream military equipment. For example, to fulfil the huge army order for Night Vision Devices, the DRDO accepts the need to import the key technology, Image Intensifier Tubes, which it has failed to develop itself.

The second big change, explain MoD sources, is the changed global mindset about providing cutting-edge technology to India. After decades of international sanctions since the 1974 nuclear experiment, Israel’s readiness over the last decade to provide India with defence technology has meant that other countries either get onto the bandwagon or get left behind. India already accounts for 30% of Israel’s arms exports and the figure is rising.

The third circumstance, the MoD points out, is the increased confidence amongst uniformed servicemen and defence scientists in evaluating and pricing technology on offer. With foreign courses and exchange programmes liberalised over the last decade, many more soldiers and scientists have developed international exposure and technological expertise. Having evaluated foreign technology as part of several ToT deals signed by India recently, there is a bank of experience as well.

Leveraging offsets allows the MoD to bargain for technology from a position of strength. After decades of being palmed off with near-obsolescent technology, MoD sources point out that vendors will now have to compete to provide India with technology. The companies tendering for any contract will have to specify, in their offset proposals, the technology they will provide as well as the cost they assign to it. Thereafter, Indian military and DRDO experts will make the decision.

While the MoD has made the decision to include ToT as a part of the offset options open to a vendor, it has not yet been promulgated. Global vendors are also waiting for an official announcement on the MoD’s earlier decisions to permit “offset banking” and waiving offsets in “fast track” procurements.

At the 6th Asia Security Conference in Singapore on Saturday, Defence Minister AK Antony became the first union minister to signal a radical shift in India’s security policy. Outlining new threat perceptions, he stated that India’s greatest security threat came not from Pakistan, China, nuclear weapons or terrorism, but from the difficulties of meeting the aspirations of all of India’s citizens at a time of rapid modernisation. This radically departs from India’s traditional position of defining security almost exclusively in terms of external threats.

The new security policy explicitly recognises the destabilising effect, at the national level, of the long-playing insurgencies in the northeast, movements like Naxalism that stem from lack of governance, communal dissension, as well as agitations like the Gujjar demand for scheduled tribe status. Security against external threats alone, says the defence minister, is not enough. “When (external) security is accompanied by such a broad sense of well being, we can be more certainly assured of stability.”

Interestingly, the MoD has framed its new concerns in the face-saving rhetoric of contribution to international stability. Mr Antony stated, “When one sixth of the world demonstrates an ability to meet its wants, manage its expectations and govern itself effectively, the significance of that achievement cannot be overvalued.”

After internal security, the MoD’s second priority is to ensure “peace and stability on India's borders and in the regions with which we have increasing interaction: the Gulf, Central Asia, the Indian Ocean region, South Asia and South East Asia.” This is not just an emerging power’s geographically expanded phrasing of what was earlier termed, “safeguarding our borders.” Instead, there seems new hope for a peaceful neighbourhood. The Defence Minister pointed to the peace processes that had transformed relations with both China and Pakistan, and said that security objectives could be met through “confidence building and a rational and realistic approach based on peaceful bilateral dialogue”.

India’s third priority is drawn from the economy’s increasing integration with global trade, investment and technology flows. Mr Antony stated, “The third security priority for us is to safeguard the material, psychological and technological basis for enhanced interaction with the rest of the world.” In specific terms, this boils down to energy and maritime security, the security of critical infrastructure, and WMD proliferation. The defence minister emphasised India’s intention to work constructively with littoral States in ensuring the security of international sea-lanes.

India’s final priority, said the defence minister, was to enhance its global clout through strong equations with key players – US, Russia, EU, China and Japan and key regions such as the South East Asia, the Gulf and the Middle East. This new approach to international affairs is markedly different from that of the Foreign Ministry’s stated position that the United Nations must be the nodal forum for global action. Mr Antony declared that, “no single forum should perhaps assume responsibility for international security related issues. Only a pluralistic security order working through a network of cooperative structures can have the legitimacy as well as the wherewithal to deal with the security challenges of the 21st century. India is ready to play its role in the shaping of this new approach to collective security.”